Selling a Common Interest Development?

Agent Advisory

Are you selling a property which is part of a Common Interest Development (CID)?  Condos, townhouses, duo-ettes, and even single family residences may have CID restrictions in place.  Agents must know what they are selling, advise the purchaser, and get all the documents to the prospective purchaser for approval. 

Why Is This So Important?

Governing documents may affect the use, control and operation of the individually owned units, as well as the common areas. What color can your window coverings be?  Where can you park your RV?  How long can your children visit you?  Can you rent out your unit if you need to?  How big a party can you have in the clubhouse?  Can you have two cats and a dog?  These are but a few of the questions agents may find discussed in the governing documents.

Assist your purchasers by becoming familiar with the disclosure documents. Read the Covenants, Conditions and Restrictions (CC&Rs), Bylaws, and Articles of Incorporation if applicable.  These documents may be recorded.  Typically not recorded, yet just as important, are the Homeowners Association (HOA) Budget, and any Rules and Regulations. If the complex has a Subdivision Public Report, read it.  Be ready to answer questions on the major sections of the report, such as the developer's contribution to the budget and under what conditions it may cease. 

An agent's responsibility includes being prepared to answer the purchaser's questions, particularly when questions of proposed assessments (and what amount) or age restrictions are discussed in the documents. Clearly these items can influence whether or not a purchaser chooses to complete the transaction.  A wise agent familiarizes himself or herself about restrictions on the use of the CID amenities, such as the pool and clubhouse, etc.   Are there any pet restrictions, smoking rules, or parking space allotments?  If so, discuss with the purchaser when you go over the documents.  Don't let an unhappy purchaser discover a critical issue AFTER the close of escrow.

Who Does What:

The Seller should complete a Request and Response for Documents to acquire the documents noted above from the HOA.  This is in compliance with various CA Civil Code sections 1365-1368.  The requested documents may also include an insurance summary and the last 12 months' minutes of the Board of Directors meetings when available.  Such documents are typically supplied by the HOA to the Seller, and then passed on to the purchaser.  Agents may also ask the Seller for an additional Disclosure Supplement which simplifies and categorizes questions in a checklist form for the Seller to answer.

The selling agent delivers the documents to the purchaser and discusses whatever is appropriate to the purchaser.  The purchaser should carefully read and review these documents as well.  If there is anything which does not meet with the purchaser's approval, the transaction may not go forward.

In Closing

The Bureau of Real Estate (formerly the DRE) considers these CID real estate documents a part of a licensee's responsibility to read and understand.  If the agent does not understand the documents, engage the services of an attorney or accountant to interpret them.

Good Luck!

A PROPERTY TO GOOD TO BE TRUE

Case Summary:

The buyers successfully owned and managed two duplexes for several years, and were ready to build their empire. They asked their former agent to find them something bigger to trade into. Their agent had never sold anything larger than a duplex. The agent’s broker had never sold anything larger than a four-plex.

A 40-unit apartment came on the market. The buyers’ agent showed the exterior of the apartment building and touted the incredibly low price per unit. The price was right, the rental market was hot, and the buyers made an offer. The listing agent and seller prepared an incredibly detailed and thorough 200-250 page disclosure package and provided these to the buyers’ agent. It seems the building had many ongoing problems with tenants’ lawsuits against the property owner, evictions, maintenance issues, etc. The buyers’ agent delivered the disclosure package to the buyers, who “signed off” without reading them. Their agent didn't go through any of the disclosures with them.

After escrow closes the problems begin to surface. The buyers are not up to the management responsibilities and the cash flow is not sufficient to cover the debt. The property is foreclosed. The buyers lose everything. They sue their agent and the broker, of course. One of their claims was that they did not understand what problems existed with the apartment building.

Questions:

Is this clearly the agent’s fault? Well, you can guess that it is below the standard of care for the agent to sell a 40-unit building with no prior experience or broker supervision. The issuance of a license through DRE gives agents the right to sell any type of property anywhere in California. But should they? This case demonstrated that the agent and broker were woefully below the level of knowledge required to do this transaction.

What Agents Can Do:

There’s a first time for everything. Agents may want to stretch their capabilities and handle unfamiliar transaction types. Agents can sell property outside of their familiar marketing area. This is not prohibited by the DRE nor by any ethical standards. The proper procedure when faced with a transaction beyond your normal capacities is to first check with your supervising broker to see if there is sufficient oversight to proceed. If not, consider referring the transaction to an agent who can properly fulfill the standard of care. A referral fee is always better than a lawsuit.

Alternatively, engage the services of a licensee experienced in the type of transaction to assist you and make sure it is done properly. A small portion of the commission is an excellent insurance policy against a lawsuit.

Finally, let your clients know that you are unfamiliar with the transaction type, or area. Let them know what steps you are taking to make sure they are properly represented. They will appreciate your honesty and your concerns for their best interests.

Postscript:

Does the buyer in this case have any responsibility for their actions, or lack thereof? These buyers acted foolishly by “signing off” on the overwhelming disclosure package, without reading or understanding it. They didn’t ask questions. The law directs buyers to look out for their own interests. The buyers failed to do that, and had to take partial responsibility for their own losses.

Whenever disclosures reach the agent's hands, do more than just deliver them. Go over all disclosures with your buyers, and use your real estate knowledge to help them understand. You don't have to interpret or research the disclosure information, just advise them what it could indicate. Help them request further detail or inspections if appropriate. Do your best to make sure that your buyers are clear what they are receiving, and how it can affect the property. All properties have problems. Buyers should know what you know, and make their own decisions accordingly.

In the end, both parties to this lawsuit suffered losses of time, money, and reputation. Don’t let it happen to you.

Good luck!

Cari Pace

THE PROBLEM NEIGHBOR

Quick Glimpse of this Case:

This posting deals with a case where the neighbors “over the fence” were openly hostile and abusive towards the sellers. Physical items as well as verbal insults were tossed back and forth. Police reports were filed. Such animosity might be based on pets, personal prejudices, or past disagreements. Good fences don’t always make good neighbors, unfortunately!

Agents Advisory:

First question, is this dispute a material fact about the property? Secondly, how do you satisfy your duty to disclose it? Third, might you be setting yourself up for trouble if you mention the neighbor’s behavior? The answers are Yes, Yes, and No.

Agents are responsible for disclosing anything which could influence the value or desirability of the property. We must disclose all material facts which are not already known to or readily observable by the buyer. The neighbor’s behavior fits this description.

How do you disclose these issues to a potential buyer? Well, in writing is best, and receipted by the buyer to prove they got it. Emails work, too. If that’s not practical, a verbal disclosure is acceptable as long as you can prove you did so. How to prove you disclosed? Notes to your communication log, done at the time you discussed the problem, will help all the parties recall that you did your duty. You may also use a witness to your conversation with the buyer. Just be ready to prove your disclosure if the buyer should come back months or years later to say you never told them.

Finally, are you setting yourself up for a personal lawsuit for slander by the neighbor? You are at risk if you state untruths; that’s slander. You can state what you personally observed, factually and without malice. If the neighbor caused you a ruckus when you held the house open, you can and should bring this up with potential buyers. If you personally didn’t experience any disturbance, disclose the problem issues as described by the seller. State that these observations came from the seller and have not been personally verified by you (unless they have). As a matter of fact, the police reports would also back up your obligation to mention the neighborhood disturbance.

Summary:

Disclose what you know, who gave you the information, and whether it has been verified by you or not. If the buyers don’t consider the neighborhood problems as important to them, they will buy. If the problems are of concern, the buyers are probably better off elsewhere. Give the buyers a contract contingency and sufficient time to meet the neighbors. Let the buyers determine if they will get along. Fully-informed buyers typically make a better decision whether to proceed with escrow or find something else.

Does this issue of problem neighbors reduce the value of the property? Yes, agents agree it would. The difficult question is by how much? If the neighbor problem is a personal one, likely to end when the seller moves out, the diminution in value is minimal. If the problem is expected to continue regardless of who moves in, the reduction in value is greater. Buyers are unlikely to choose a home with built-in problems if there are other homes available with no such issues. It takes a buyer incentive to sell a home with difficult neighbors.

Good luck!

Cari Pace

Material Facts: Who Knows Best?

The Problem

Too many buyers are suing agents for misrepresenting or failing to disclose material facts. Of course this only comes up after escrow has closed and the buyers discover these drawbacks to the property. What's really frustrating is that the detrimental items which should have been disclosed are frequently known to the seller, but not to the agents. Agents are sued for failure to know the facts and being motivated to hide them. It's true that agents want the buyer to purchase. Agents show off the best aspects of the property. But agents can always sell the buyer another property. The seller is the one who gains the most by having the transaction close. Why expect the agents to have more knowledge about the property than the seller? Why are agents blamed for not having x-ray vision? Do some sellers hide material facts? Yes. Do some sellers "put a spin" on troubling issues? Yes. Do some sellers misrepresent or overlook material facts? Yes. And here's the really sad part...buyers may want to believe! After all, buyers like the property enough to buy it!

What's our defense?

Since buyers may be starry-eyed about the property they have chosen, an agent's role is to be an extra set of eyes. Agents can and should point out potential problems, and recommend the buyer get outside inspections of the structural and perhaps troublesome components of the property. In addition to the standard pest control, pool, and home/contractor inspections, are there any other areas which are of interest or concern to the buyers? For example, if the buyers tell you they plan to remodel, expand, or rehab the property, recommend that they entertain outside bids as to what's involved before they close escrow. It doesn't do any good for them to discover that there are construction issues with area height restrictions, expanding a leach field, water or sewer hookups, and the like AFTER they have closed escrow.

One Solution
Presume the seller doesn't know everything. Recommend inspections by outside professionals, and note that you did this in your communication log. If a buyer doesn't want to spend the money on an inspection, make a note of that, and possibly put it in writing as a letter or email to the buyer. Many companies use a checklist of inspections, like the one I've seen by Professional Publishers. The checklist is great because the buyer initials in the column indicating that an inspection is authorized or declined. Let the buyers choose their inspectors. The buyer should use professional inspectors, not a friend or relative. There should be a written report of the findings, however brief. Keep copies in your transaction file, for at least three years. It seems that the buyer who doesn't want to spend money on inspections before escrow closes, always has enough money for an attorney after.

When Buyers Ask your Opinion

When a buyer asks a question about the property, an agent needs to be sure that the answer is correct, or at least came from a quoted source. An agent is responsible for information given to the buyer's questions. An agent is at risk if he or she merely gives an answer without indicating the source or whether or not the agent has determined that the answer is true. There are a few things we know for certain, and an overwhelming number of things that we do not. If a buyers asks "How big is an acre?", we can answer "43,560 square feet". If a buyer asks "How big is the lot?" we can answer "half an acre" only as long as we are ready to guarantee it! But where did that "half acre" figure come from? The seller? The MLS? The assessor's records? An appraisal? You get the point. Unless the agent has actually measured the lot size, and knows it to be truly a half-acre, don't give the size without qualifying your answer. It is critical to answer the buyer's question with the source of the information you're giving.

Here's another example. Buyer asks "How old is the roof?" The appropriate answer is "According to the (seller), it's (four years) old. I personally haven't verified this. Since the roof could be older, I recommend we get an inspector to verify what the (seller) is telling me." I recall a seller on one of my listings telling me that the roof was a couple of years old. It didn't look like it to me. I called the city and asked about a roof permit, since their records went back ten years. The city had nothing on file. So either the roof was done without a permit, or the seller was off by many years, or the city employee looked up the wrong file. Regardless, when the buyer asked about the roof, the buyer got the whole story, including my push to get a roof inspection to verify exactly what was real.

Do Agents Have to be Detectives?

Of course not, but we must be diligent in our disclosures. We also should direct buyers to the best source of the information they seek. If buyers want to know if they can expand the house, or if the non-conforming addition can be made into a legal unit, accompany them or send them directly to the local planning department to get accurate answers. There have been times when the local governmental agencies gave out incorrect information. If this erroneous information was given to the agent, and the agent then passes it on to the buyers, who gets blamed? Yes, the agent. It's a far better idea to accompany your buyers to the department to let buyers get the answers they need directly from the source.

On occasion, listing agents may want to check out information for themselves. That's a great plan and will demonstrate how diligently you work for your seller, or potential buyers. Just make sure to remember to attribute the source of your fact, and state if you can verify it or not. For example, when I had the listing with the questionable roof, I could have sent the buyers directly to the city to to check out the roof permit for themselves, but that wouldn't impress the buyers. Besides, I wanted to know, to verify the information given to me by the seller. It isn't required that agents sleuth out and verify answers to direct buyer questions. It is required that agents let buyers know where the answers came from and if the information is likely to be reliable, or not.

Good luck!

Reading the Preliminary Title Report

Quick Glimpse of This Case:

The buyer made an offer on a house, contingent upon him selling his present home. The sellers responded “no contingency offers” so the buyer wrote up another offer without one. Sellers accepted and escrow was opened. Buyer was notified of acceptance and put his home on the market immediately. He didn’t want to make payments on two homes.

The sellers advised their agent in confidence that they owed money to the IRS and had a few other court-ordered settlements on record against them. The sellers asked their agent to hold off delivering the Preliminary Title Report (PTR) to the buyer so they might clear these off title. The agent, who was also representing the buyer, agreed to wait a few weeks before showing the PTR to the buyer. The buyer was unaware of any of this and was assured the transaction was proceeding as planned.

The buyer’s home sold. A few days away from closing escrow on the buyer’s home, the buyer asked about the missing PTR on his new home. With one glance at the PTR, it was clear that the sellers were not able to remove the money judgments on title, and there was insufficient equity to pay these liens. The buyer was compelled to complete the sale on his present residence, but had no home to move into. Left homeless, he consulted an attorney.

Advisory:

The licensee is the fiduciary of the client, and the licensee’s duties of utmost care, integrity, honesty and loyalty are spelled out in the agency disclosure. The licensee is expected to be knowledgeable in real estate matters. The Preliminary Title Report, or PTR, is a snapshot of the recorded liens, easements, and other matters of records which affect the property.

The delivery of the PTR to the buyer is typically called for in the sales contract. It is an agent’s duty to take a look at the PTR to discover any potential problems. An agent should call any such issues to the client’s attention. In this case it was the lack of equity and the seriousness of the seller’s liens which raised a red flag. This should have been disclosed to the buyer. Even though the seller’s debts are a confidential matter, if such debts will prevent escrow from closing, or delay the close, it is a material fact affecting the value or desirability of the property.

There are lesser issues of title which can be a red flag to the buyers. As an example, if the buyer indicates an intention to put a pool in the back yard, and the PTR shows an easement for an underground utility pipe in the area, the problem is obvious. Many title issues can be resolved with enough time. For example: Is there a name on title (like an ex-spouse) who is not part of the signed sales agreement? Will the present lender be willing to negotiate a short payoff on the outstanding liens? Is there an easement for a driveway or parking?

In many cases the PTR indicates the existence of another governing document by recorded reference to it. The presence of a lease may be indicated by a recorded memorandum. Covenants, Conditions, and Restrictions (CC&R’s) are typically indicated by reference. Agents should ask the title company for a copy of such further documents.

Summary Points:

Is an agent required to interpret the PTR? No. If the agent or client has questions, the appropriate title officer should be contacted for answers. Put your client in touch with the title officer. If you relay such information, be sure to quote your source and whether you have verified it or not.

Is the PTR accurate? No. That’s why it’s called “preliminary”. It is an offer from the Title Company to issue a policy of title insurance. These reports are updated every few weeks, so the PTR you get today might have been run last month. Yesterday’s new lien may not show up at all. It is also true that a recorded Deed of Trust reflects the original amount of the Note, not necessarily the current balance.

Should agents advise the buyers to read the PTR? Yes. Buyers may not be aware that the matters of title, which are on record, can and do impact their ability to use and enjoy the property. This same standard of care applies to agents who sell properties that have Covenants, Conditions, and Restrictions (CC&R’s) recorded. One agent carelessly told his buyers to “read these CC&R’s only when you want to fall asleep” and was sued for this poor advice. Condos, townhouses, and PUD’s are governed by such documents. Agents should let their clients know how important it is to understand what they can and cannot do with the property they are buying.

Good Luck!

Cari Lynn Pace

For further information, see Easements blog from April 10, 2008

Who is Your Client?

Quick glimpse of this case: A buyer made an offer which included the right to assign the purchase agreement. Using the phrase “or assignee” might indicate that the buyer is scouting out property for other buyers. The scout ties up the property and then finds a replacement buyer, with the intent of making a profit or a partnership purchase. No problem so far.

This contract between the seller and the scout was ratified and escrow was opened. Shortly thereafter, the scout found a replacement buyer for the property. The scout turned over his purchase rights to this buyer, but never did so with any formal agreement. There was no assignment of the contract. The scout simply substituted the buyer’s name into all disclosure documents and removals of contingencies.

The agent, who had written up the agreement and started the transaction and escrow with the scout, soon knew there was to be a different buyer taking title. The agent, however, continued to deliver disclosures and contingency removals to the scout. The scout forwarded these documents to the assignee buyer. This buyer, relying on the scout, initialed and signed as instructed. The agent had no contact with the buyer at all, conducting business only with the scout.

Now it gets really interesting: The purchase price was lowered during the escrow. Rather than use an Addendum, the agent redrafted page one of the purchase agreement to reflect the negotiated price. The agent took off the scout’s name and put the buyer’s name into the paperwork. Buyer signed. Seller re-signed with the new buyer and escrow continued. The agency relationship paragraph confirmed the agent now represented the newly-named buyer. Keep in mind that the buyer, not the scout, signed this contract. The buyer still had no contact with the agent, relying totally upon the scout for advice and assistance.

The buyer closed escrow, and took title. When later problems surfaced between the buyer and the scout, the agent was brought into the dispute. The agent protested “I never met the buyer, I never sent them anything, and I don’t know anything about them, so I don’t represent them. I only represented the scout buyer.” Would you agree with this defense?

Advisory: There are problems when an agent fills in the “confirmation of agency” paragraph, indicating the fiduciary duty to represent the buyer, but never has contact with them. Agency Law is clear that our duties of “utmost care, integrity, honesty, and loyalty” exist once agency is created. Can we do this if we never have contact with the client? Are we obligated to represent clients we have never met? And if we never have any contact, how could agency be created?

In fact, this transaction demonstrates how paperwork created the agency, not the actions of the agent or client. The fiduciary duties existed from agent to buyer, even though there was no client contact. When the client suffered damages, the agent was implicated.

Summary: This agent did nothing to represent the buyer, even though the agent’s name was on the line. The agent was unable to show there was any care, integrity, honesty, or loyalty given to the buyer. The agent paid dearly for this mistake. In my opinion, the agent was bound to be the fiduciary once the purchase agreement was signed with the agent confirmation.

What if: Yes, you can be involved in a transaction without creating agency, but you must be careful about your words and actions, as well as disavow any agency relationship in the paperwork. If “no agency” is your goal, be very clear.

Final Advisory: If your contract allows the buyer to substitute an assignee, it’s advisable to use a written assignment, or a substitution of contract if all parties agree. Your escrow holder needs to be involved. Get a legal opinion to make sure it’s done properly.

Good luck!
Cari Lynn Pace

Next column: Agent Sued for Not Covering Prelim with Buyer

Easements: Should You Know What They Mean?

Quick glimpse of this case: An agent showed a home which had a greenhouse. The agent said "There's a recorded easement for the greenhouse over the neighbor's property line. It's in the Preliminary Title Report." Agent delivered PTR, buyer signed off on it, purchased the home and greenhouse, and didn't ask any further questions.

The buyer didn't get along with the neighbor. Neighbor planted trees around the greenhouse, blocking light. Buyer thought they "owned" the property under the greenhouse, and could remove the trees. Buyers were told by their attorney what their easement entitled them to do. Neighbor kept trees. Buyer sued agent for "not interpreting" easement.

Agents have been sued for misrepresenting the boundaries of a property, no surprise here! What is dismaying is that many cases expect the agent to "investigate" and "interpret" the easements. This isn't in our job description.

Advisory: Easements can be confusing and very technical. Attorneys are the best at interpreting easements and the rights that go with them. Many title officers are qualified to do this as well. For licensees, the best course of action is to obtain the Preliminary Title Report and read it over. Deliver it to your clients and go over it with them, or instruct them to read it and check in with you with their questions. Most sales contracts contain a standard "built-in" contingency regarding the buyer approving the title report and matters affecting title. Since this issue is important enough to be part of every purchase agreement, make sure the buyers read the PTR documents.

Summary Points: It's not a licensee's job to interpret what an easement entitles someone to do or not do. It's your job to know 1) that easements certainly do impact the use of the property and 2) advise your buyers of that fact. Follow up by 3) instructing them to read the PTR and 4) encouraging them to ask questions. If there is anything they don't understand, get title issue professionals to answer. The final advice is 5) refrain from interpreting or making statements about the easement, unless you are quoting your source and explaining if you have personally verified the information or not. Buyers rely on what you say.

What if: Okay, so you read the PTR and find yourself confused. Your client is confused, too. No problem. Call the title company and ask your questions. Put your client on the line in a conference call. Doing this assures you that the source of the information is not you, it is the title officer. If there are indications that the property has some further or referenced covenenats, conditions, restrictions, or recorded rules, regulations, etc. ask the title company to research and get you and your client a copy of these. Read these additional title documents, as they are material facts which can affect the value or desireability of the property. Again, if you and your client don't understand what you read, you and your client can and should ask questions of the title company. Email works just as well as telephone in this regard. Send a BCC to yourself so you have a record of your email communications with your client and the title officer.

Perhaps you want to get the information yourself, and tell your clients what it means to them. Be careful! If the title officer gives you information, and you relay that information to your clients, be sure to tell your clients who gave you the data and that you didn't verify it yourself. If you interpret the issues of title, you are reaching beyond your duties as a real estate licensee and opening yourself up to risk.

Next column: Who Is Your Client?